HDFC Bank Ltd vs. ACIT (Bombay High Court)

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 462 OF 2017

HDFC Bank Ltd. ]
HDFC Bank House, Senapati Bapat Marg ]
Lower Parel, Mumbai 400 013 ] …Petitioner.

Vs.

1) Assistant Commissioner of Income Tax ]
2(3)(1), Mumbai, Room No.552, 5th ]
Floor, Aayakar Bhavan, Maharshi ]
Karve Marg, Mumbai 400 020 ]

2) Deputy Commissioner of Income Tax ]
(Transfer Pricing) 2(2)(2), Room No.1 ]
20th Floor, Air India Building, Nariman ]
Point, Mumbai – 400 021 ]

3) Commissioner of Income Tax -2 ]
Room No.344, 3rd Floor, Aaykar bhavan ]
Maharshi Karve Road, Mumbai400020 ]

4) Union of India, Through the Secretary ]
Department of Revenue, Ministry of ]
Finance, Govt. of India, North Block ]
New Delhi 110 001 ] …Respondents.
…..

Mr J.D. Mistri Sr. Counsel a/w Mr Madhur Agarwal i/b Mr Atul
Karsandas Jasani for the Petitioner

Mr P.C. Chhotaray for the Respondents.
……..

CORAM : S. C. DHARMADHIKARI &
B.P.COLABAWALLA, JJ.

RESERVED ON : 29th August, 2018.

PRONOUNCED ON : 20th December, 2018

JUDGMENT [ PER B. P. COLABAWALLA J. ]:

1. By this Petition, the Petitioner – bank seeks a writ of
certiorari for quashing the impugned order dated 29th December,
2016 (Exh “F”) and the impugned reference dated 29th December,
2016. The impugned order dated 29th December, 2016 (Exh “F”)
passed by Respondent No.1 holds that certain transactions entered
into by the Petitioner are “Specified Domestic Transactions” (for
short “SDTs”) as per section 92BA(i) of the Income Tax Act, 1961
(for short the “I.T. Act”) and the Arms Length Price (“ALP”) of the
said transactions are required to be determined by making a
reference to Respondent No.2. It is pursuant to this order that the
reference dated 29th December, 2016 was made to Respondent No.2
under section 92CA(1) of the I.T. Act for determination of the ALP in
the Petitioner’s case for the Assessment Year (for short “A.Y.”)
2014-15. It is the case of the Petitioner that the impugned order as
well as the impugned reference are ex-facie without jurisdiction,
illegal, unsustainable, contrary to the principles of natural justice
and contrary to law, and therefore, ought to be quashed and set aside
by us in our writ jurisdiction. This is how the present Writ Petition
has been filed.

2. Before we set out the legal submissions of the respective
parties, the brief facts of the case and which would be necessary to
determine the controversy before us, are as under:-

(a) The Petitioner is a public limited company registered under
the Companies Act, 1956 and is also registered as a banking
company with the Reserve Bank of India (“RBI”). The
primary business of the Petitioner is banking. The
Petitioner filed its assessment of income for the Assessment
Year (“A.Y.”) 2014-15 on 30th November, 2014 declaring a
total income of Rs.12595,27,63,920/-. The Petitioner, along
with the return of income, also filed Form 3CEB inter alia
disclosing certain ‘specified domestic transactions’
entered into by it during the relevant year. Thereafter, the
Petitioner’s case was selected for scrutiny assessment.
During the scrutiny, the Petitioner again filed a copy of
Form 3CEB on 11th June, 2016. It is the case of the
Petitioner that the SDTs entered into by it and reported in
Form 3CEB were similar to the transactions entered into by
the Petitioner in the earlier assessment year, namely, A.Y.
2013-14 and the Transfer Pricing Officer (for short the
“TPO”) had accepted that all the transactions entered into
by the Petitioner were at an ALP. This was held by the TPO
in his order dated 24th October, 2016.
(b) It is in these circumstances that the Petitioner has averred
that it was surprised to receive a show cause notice from
Respondent No.1 on 29th December, 2016 at 01.39 a.m., vide
an e-mail, for the alleged non-reporting of certain related
party transactions for the A.Y. 2014-2015 and required the
Petitioner to provide the reasons why the same should not
be reported to Respondent No.2 for determination of the
ALP. This show cause notice was to be replied to by the
Petitioner by 11.00 a.m. on the same date i.e. 29th December,
2016. According to Respondent No.1 certain transactions
(mentioned hereinafter) were entered into by the Petitioner
with related parties as per section 40A(2)(b) which were
not reflected in form 3CEB filed by the Petitioner. Those
transactions are as under:
i. The Petitioner purchased Loans from HDFC Ltd and its
subsidiaries amounting to Rs.5164 Cr and Rs.27.72 Cr
respectively.
ii. The Petitioner has received services from HBL Global
Private Ltd. (for short “HBL Global”) for which the
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Petitioner paid an amount 492.5 Cr. and the Petitioner
was having beneficial ownership of HBL Global.
iii. The Petitioner has paid interest amount 4.41 Crore to HDB
Welfare Trust which was a Trust created by the Petitioner.
(c) Since Respondent No.1 was of the opinion that these
transactions were entered into with related parties as set
out in section 40A(2)(b) of the IT Act, they ought to have
found place in Form 3CEB filed by the Petitioner. Since this
was not done, the show cause notice was issued.
(d) According to the Petitioner no personal hearing was given to
them by Respondent No.1 in relation to these transactions.
Be that as it may, the Petitioner, vide its letter dated 29th
December, 2016, submitted a reply with respect to each of
these above mentioned three transactions and gave an
explanation as to why they could not be termed as SDTs.
This being the case the Petitioner stated that there was no
requirement on their part to disclose the same in Form
3CEB and correpondingly there was no question of making a
reference to the TPO for determining the ALP in relation to
these three transactions.
(e) In a nutshell, it was the Petitioner’s case that the
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transaction referred to in item (i) above [the purchase of
loans from HDFC Ltd], firstly did not relate to A.Y. 2014-
2015 but in fact the aforesaid transaction was entered into
by the Petitioner in the earlier year and were relating to
A.Y. 2013-2014. For A.Y. 2013-14 transfer pricing
assessment had already been completed and become final.
The Petitioner further submitted that in any event, none of
the promoters of the Petitioner held more than 20% of the
shareholding individually and hence these transactions did
not take place with a person as contemplated under section
40A(2)(b) of the IT Act. The other submission with
reference to this transaction was that admittedly this
transaction was a transaction of purchase of loans which
could never be termed as an expenditure, and therefore, the
same did not come within the ambit of section 92BA(i) of the
IT Act.
(f) As far as the transaction listed at item (ii) is concerned
[payment of Rs.492.50 Cr to HBL Global for services
rendered], the Petitioner submitted that it did not have any
direct shareholding in HBL Global as that company was a
subsidiary of Atlas Documentary Facilitators Co. Pvt. Ltd.
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(“ADFC Ltd.”) in which the Petitioner has a 29%
shareholding. The Petitioner submitted that indirect
shareholding is not covered or contemplated under section
40A(2)(b) of the Act, and therefore, the transactions with
HBL Global was not covered under the said section. This
being the case, the contention of the Petitioner was that this
transaction also could never fall within the ambit of a SDT as
understood under section 92BA(i). In support of this
argument, the Petitioner submitted that the Petitioner
cannot be regarded as the beneficial owner of the shares of
HDL Global as the beneficial owner of these shares was
ADFC Ltd. and not the Petitioner.
(g) As far as the transaction listed in item (iii) is concerned
[payment of interest of Rs.4.41 Cr to HDB Trust], the
Petitioner submitted that HDB Welfare Trust was
established for providing general welfare measures such as
medical relief and educational assistance to the employees
of the Petitioner bank. The Petitioner bank further
submitted that as the beneficiaries of the HDB Welfare Trust
were the employees of the Petitioner and not the Petitioner,
the Trust does not come within the ambit of a person/party
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as required under section 40A(2)(b) of the Act.
(h) After considering these objections of the Petitioner,
Respondent No.1, vide his impugned order dated 29th
December, 2016, rejected the objections that the aforesaid
transactions were not SDTs, and therefore, held that
domestic transfer pricing provisions would be applicable. In
a nutshell, Respondent No.1 held that the Petitioner was
involved in the transaction of purchase of loan which is a
business asset of the Petitioner and the purchase of such
asset from a related party falls under section 40A(2)(b) of
the IT Act. Respondent No.1 further held that the
consolidated holding of the promoters was in excess of 20 %
of the shareholding of the Petitioner and hence, the
beneficial ownership clause was applicable. Respondent No.1
further went on to hold that since the Petitioner holds 29%
shareholding of ADFC Ltd., which in turn holds 98.4% of the
shares of HBL Global, the Petitioner had beneficial
ownership and voting rights of more than 20% of HBL Global
and hence the transaction with HBL Global was with a
person/party as covered by section 40A(2)(b) of the I.T. Act.
As far as the Trust was concerned, Respondent No.1 held
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that the Petitioner possesses more than 20% of the rights in
the said Trust which makes it a related party as per the
provisions of section 40A(2)(b) of the Act. It is in these
circumstances that Respondent No.1 passed the impugned
order and thereafter, on the very same day (namely, on 29th
December, 2016) made a reference (in relation to all the
abovementioned three transactions) under section 92CA(1)
of the Act to Respondent No.2 for determining the ALP.
(i) Once this reference was made, Respondent No.2 issued a
notice dated 30th December, 2016 under section 92CA(2) of
the I.T. Act asking the Petitioner to produce various
information in relation to international transactions and/or
SDTs referred to by Respondent No.1 vide his letter dated
29th December, 2016. This was for A.Y. 2014-2015. To this
letter of Respondent No.2, the Petitioner replied by
contending that certain basic documents which the
Petitioner had maintained with respect to the international
transactions / SDTs reported by the Petitioner in Form
No.3CEB were already submitted and those transactions
were accepted to be SDTs. It was the case of the Petitioner
that the transactions referred to Respondent No.2 by
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Respondent No.1 were not SDTs, and therefore, the
Petitioner was not obliged in law to submit any documents to
Respondent No.2 with reference to these transactions. The
Petitioner also alleged that the reference made to
Respondent No.2 was not only bad in law, but also appeared
to be made in undue haste by Respondent No.1.
(j) It is thereafter, and in these facts and circumstances, that
the present Writ Petition has been filed seeking quashing
and setting aside of the impugned order dated 29th
December, 2016 passed by Respondent No.1 as well as the
impugned reference dated 29th December, 2016 under which
Respondent No.1 made a reference to Respondent No.2 for
determining the ALP for the above mentioned three
transactions and which, according to Respondent No.1, were
SDTs.
(k) After this Petition was filed on 23rd June, 2017, the Division
Bench of this Court recorded that the matter has debatable
issues which require consideration, and therefore, the
matter was placed for hearing on 14th July, 2017. The
Division Bench directed that till then the TPO shall not pass
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any final order. The Division Bench also recorded that if
possible an endeavor shall be made to dispose of this Petition
finally at the stage of admission. Thereafter, the matter has
been adjourned from time to time and has now come up
before us and with the consent of parties we have heard it
finally. In these circumstances we issue Rule. The
Respondents waive service. By consent, Rule is made
returnable forthwith and heard finally.
3. In this factual backdrop, learned Senior Counsel Mr J.D.
Mistri appearing on behalf of the Petitioner, submitted that in the
facts of the present case there were three transactions which the
Revenue had alleged, were SDTs. They are – (1) Loans of Rs.5164
Crores purchased by the Petitioner from the promoters (HDFC Ltd.)
and loans of Rs.27.72 Crores purchased from the subsidiaries; (2)
Payment of Rs.492.50 Crores by the Petitioner to HBL Global for
rendering services; and (3) payment of interest of Rs.4.41 Crores by
the Petitioner to HDB Welfare Trust. Mr Mistri submitted that it is
only when the aforesaid transactions, or any of them, are a SDT, and
which are not reported by the assessee, then the A.O. is required to
issue a show cause notice to the assessee and pass an order disposing
of the objections of the assessee before referring the said SDT to the
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TPO for determining the ALP. He submitted that to challenge the
order of the A.O. there is no other alternate efficacious remedy and in
fact this Court in the case of Vodafone India Services Pvt. Ltd. Vs.
Union of India [361 ITR 531] has held that such an order passed
by the A.O. rejecting the objections of the assessee that the
transactions are not SDTs, can be challenged by way of a Writ
Petition. Another reason stated by Mr Mistri why the Writ Petition
came to be filed was that once the transaction is treated as a SDT,
penalty under section 271G of the Act (at 2% of the value of the
alleged SDT) is leviable, even if the TPO was to come to the
conclusion that the transactions were at the ALP. It is in these
circumstances, Mr Mistri submitted that the Petitioner has been
constrained to approach this Court in its extraordinary, equitable
and discretionary jurisdiction under Article 226 of the Constitution
of India.
4. Thereafter, Mr Mistri submitted that neither of the three
transactions are a SDT as wrongly held by Respondent No.1. He
submitted that as far as the loans of Rs.5164 Crores purchased by
the Petitioner from the promoters as well as Rs.27.72 Crores
purchased from the subsidiaries is concerned, he stated that the
aforesaid transaction is not a transaction relating to the assessment
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year in question, namely, A.Y. 2014-15. In this regard he relied upon
the annual accounts of the Petitioner annexed at pages 100 & 101 of
the paper book. According to Mr Mistri, this submission was not
even considered by the A.O. in the impugned order while rejecting
the objections of the Petitioner. Mr Mistri submitted that this
transaction related to A.Y. 2013-14, for which the Transfer Pricing
Assessment was already completed. This being the case, at the
outset, Mr Mistri submitted that this transaction could never be
taken for A.Y. 2014-15 and be treated as a SDT.
5. Thereafter, Mr Mistri submitted that in any event, this
transaction of purchasing loans could never be a SDT. Mr Mistri
submitted that for a transaction to fall within the meaning of a SDT
under section 92BA(i) of the Act, the transaction has to be one which
is not an international transaction and in which any expenditure in
respect of which payment has been made or is to be made by the
assessee to a person referred to in section 40A(2)(b) of the Act. He
submitted that section 40A(2)(b) of the Act refers to certain
persons, and the transaction in question, namely, the purchase of
loans from the promoters of the Petitioner (HDFC Ltd.) did not fall
within any of the persons mentioned in section 40A(2)(b) read with
explanation (a) thereof, and which is appended to section 40A(2)(b)
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of the Act. In this regard, he brought to our attention section
40A(2)(b)(iv) of the Act and contended that the person referred to
in the said sub-section has to have a substantial interest in the
business or profession of the assessee (in the present case the
Petitioner). He submitted that explanation (a) sets out what is the
meaning of ‘substantial interest’ and stipulates that in a case where
the business or profession is carried on by a company, such person
is, at any time during the previous year, the beneficial owner of the
shares carrying not less than 20% of the voting power. In the facts of
the present case, Mr. Mistri submitted that admittedly HDFC Ltd. is
the beneficial owner of only 16.39% of the shares of the Petitioner
and hence section 40A(2)(b) was not at all applicable to the present
transaction. He submitted that the Revenue had grossly erred in
clubbing the shareholding of HDFC Ltd. with the shareholding of its
subsidiary, namely, HDFC Investments Ltd. (and which has a 6.25%
shareholding in the Petitioner), to cross the threshold of 20%. To put
it differently, Mr Mistri submitted that HDFC Ltd. holds 16.39% of
the shareholding of the Petitioner and HDFC Investments Ltd. holds
6.25% of the shares of the Petitioner. To cross the threshold of 20%
as required under section 40A(2)(b), the Revenue is seeking to club
both these shareholdings together. He submitted that in law, this can
never be done. He submitted that in law, the Parent Company (here
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HDFC Ltd.) can never be said to be the beneficial owner of the
properties of its subsidiary (here HDFC Investments Ltd.). He
submitted that the shares held by HDFC Investments Ltd in the
Petitioner was nothing but the movable property of HDFC
Investments Ltd. This being the case, Mr. Mistri submitted that the
Revenue could never club the two shareholdings together to cross
the threshold of 20% as required by section 40A(2)(b) read with
explanation (a) thereof. In support of this proposition, Mr. Mistri
placed reliance on the following decisions of the Supreme Court:-
(a) Bacha F. Guzdar Vs. CIT [(1955) 27 ITR 1 (SC)];
(b) Vodafone International Holdings BV Vs. UOI [341 ITR
1 (SC)]; and
(c) BA Mohota Textile Traders Pvt. Ltd. Vs. DCIT [397
ITR 616 (Bom)].
6. To further substantiate this argument, Mr Mistri also
placed reliance on the meaning of the word “beneficial owner” as
appearing in the Black’s Law Dictionary as well as Tax Laws Lexicon
(2012 Edition). According to Mr Mistri, Black’s Law Dictionary
defined ‘beneficial owner’ as ‘one recognized in equity as the owner
of something because use and title belong to that person, even though
the legal title may belong to someone else; especially one from whom
property is held in Trust’ . Similarly, according to Mr Mistri, Tax
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Laws Lexicon (2012 Edition) defines ‘beneficial owner’ as ‘the
person who is not the legal owner but has the right to deal with the
property as his own and has a right to enjoy the income.’ Mr. Mistri
submitted that even section 89 of the Companies Act, 2013 requires
a disclosure to be made to the Company (in the present case the
Petitioner) by the owner of the shares if the owner is not the
beneficial owner. In the present case no such disclosure is required
to be made by HDFC Investments Ltd., and in fact, no such disclosure
has been made in terms of section 89, by HDFC Investments Ltd. He
therefore submitted that HDFC Ltd. (the parent company of HDFC
Investments Ltd.) could never be said to be the beneficial owner of
the shares owned by HDFC Investments Ltd. in the Petitioner.
7. Mr Mistri then submitted that it is undisputed that there
cannot be more than one beneficial owner of the shares. It cannot be
that two different persons are the beneficial owners of the same
shares. If we were to accept the submission of the Revenue, the same
would lead to a complete absurdity. Mr Mistri submitted that take for
example Company ‘A’ has a wholly owned subsidiary, Company ‘B’.
In turn, the shares of Company ‘C’ are held 90% by Company ‘B’ and
10% by Company ‘A’. If one was to give the interpretation as sought
for by the Revenue, then it would mean that Company ‘A’
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beneficially owns 100% of Company ‘C’ which would lead to an absurd
situation that Company ‘B’; though owning 90% of the shareholding
in Company ‘C’, would not be regarded as having a substantial
interest in Company ‘C’ as Company ‘B’ cannot be said to be the
beneficial owner of its 90% shareholding in Company ‘C’. Further, if
the interpretation of the Revenue was to be held as correct then one
will not have to not stop there and then also see the shareholders of
Company ‘A’ as the beneficial owner of the shares of Company ‘C’.
This would then lead to absurd results, namely, that then even
Company ‘A’ also would not have a substantial interest in Company
‘C’ and it would be the shareholders of Company ‘A’ that would have
a substantial interest in Company ‘C’. This, according to Mr Mistri,
would lead to startling results. He therefore submitted that such an
interpretation has to be avoided at all costs.
8. Mr Mistri further submitted that a Guidance Note issued
by the Institute of Chartered Accountants of India on Report under
section 92E, specifically provides that for the purposes of section
40A(2)(b) one has to consider only direct shareholding and not
derivative or indirect shareholding. He submitted that though the
Guidance Note is not binding on this Court, the Supreme Court in the
case of CIT Vs Virtual Soft Systems Ltd. [404 ITR 409 (SC)] has
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held that the Guidance Note can be used as an aid to interpret the
provision. In furtherance of this argument, Mr Mistri submitted that
wherever the Legislature intended, they have used the term
“directly or indirectly” throughout the Income Tax Act, 1961.
Some of the examples given by Mr Mistri were sections 92A(1),
92A(2), 285A, 9(1)(i), and explanation 5 to section 9(1), to name a
few. Mr Mistri submitted that in fact the term “directly or
indirectly” is used more than 40 times in the Act. What is important
to note is that this very term, ‘directly or indirectly’ is
conspicuously absent in explanation (a) to section 40A(2)(b) of the
Act, was the submission of Mr. Mistri. If the interpretation of the
Revenue was to be accepted, the same would tantamount to doing
serious violence to the language of the statute by introducing words
in explanation (a) to section 40A(2)(b) which have not been
provided by the Legislature. Mr. Mistri submitted that this is more so
when one takes into consideration that explanation (a) to section
40A(2)(b), being a deeming provision, must be interpreted strictly.
He, therefore, submitted that the present transaction, namely,
purchase of loans by the Petitioner from HDFC Ltd. and its subsidiary
can never be termed as a SDT.
9. In the alternative to the above argument, Mr Mistri
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submitted that the purchase of these loans can never be an
‘expenditure’ as covered under sections 28 to 37 of the Act. It was
basically a purchase of an asset and hence not an ‘expenditure’
covered under section 92B(A)(i). Mr Mistri submitted that section
40A would be applicable when an amount expended or paid is
claimed as a deduction whereas loans purchased by the Petitioner is
not claimed as a deduction and which is reflected as an asset in the
balance-sheet. He submitted that even the A.O. accepts in the
impugned order that the transaction of purchase of loans is an asset
of the Petitioner. Mr Mistri submitted that section 92BA(i) would
apply only when an expenditure is incurred for which a payment is
made to a party covered under section 40A(2)(b) of the Act. In the
present case, the purchase of loans was not an ‘expenditure’ but
payment made for acquiring an asset, and hence, the same could
never fall within the ambit of section 92BA(i) at all. Mr Mistri
submitted that it is not possible to purchase an asset without making
payment but that by itelf, without anything more, would not mean
that such payment is an ‘expenditure’ as understood under the Act.
He submitted that for purchasing an asset the purchaser pays a price
for acquiring the asset and it is referred to as the consideration for
the purchase of that asset and not an ‘expenditure’ for that asset. He
submitted that the consideration paid for acquiring the asset can
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never be said to be in the nature of ‘expenditure’ so as to come within
the ambit of section 92BA(i) of the Act. Mr Mistri was at pains to
point out that an asset would be reflected in the balance-sheet of the
company whereas ‘expenditure’ would not find place in the balancesheet
but would be reflected in the Profit & Loss Account. These
loans that were purchased by the Petitioner are reflected in the
balance-sheet of the Petitioner bank and not in the Profit & Loss
Account. This is another reason why Mr Mistri submitted that the
present transaction, namely, purchase of loans by the Petitioner,
could never fall within the definition of a SDT under section 92BA(i)
of the Act.
10. As far as the transaction with HBL Global is concerned,
namely, the payment made by the Petitioner of Rs.492.50 Crores to
HBL Global for rendering services, Mr Mistri submitted that the
Petitioner bank holds 29% shares of a company called Atlas
Documentary Facilitators Co. Pvt. Ltd. (“ADFC Ltd.”) which in turn
holds 98.4% shares of HBL Global. He submitted that admittedly the
Petitioner does not have any shareholding in HBL Global and hence
the Petitioner does not beneficially own more than 20% of the shares
of the HBL Global Pvt. Ltd. or vice versa, as contemplated under
section 40A(2)(b) of the Act. He, therefore, submitted that the
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payment of Rs.492.50 Crores for the services rendered by HBL
Global to the Petitioner was not a transaction that could fall within
section 92BA(i) of the Act to be termed as a SDT. Mr. Mistri
submitted that Respondent No.1 erred in holding that merely
because the Petitioner holds 29% shares of ADFC Ltd., which in turn
holds 98.4 % shares in HBL Global, the Petitioner would be regarded
as a beneficial owner of the shares and voting rights of HBL Global.
Once again, Mr Mistri submitted that Respondent No.1 has
completely misconstrued meaning of the word “beneficial owner” of
the shares. He submitted that the legal and beneficial owner of
shares of HBL Global is only ADFC Ltd. and cannot be said to be any
shareholder of ADFC Ltd. He submitted that it is now well settled
that the shareholders of a company cannot be said to have any
beneficial interest in the assets of that company. He submitted that
98.4% shareholding of ADFC Ltd. in HBL Global was an asset /
movable property of ADFC Ltd. By no stretch of the imagination,
therefore, could the Petitioner be held to be the beneficial owner of
the shares held by ADFC Ltd in HBL Global. He, therefore, submitted
that this transaction could never be termed as a SDT as understood
under section 92BA(i) read with section 40A(2)(b) of the Act. Mr
Mistri submitted that if the logic of Respondent No.1 was to be taken
to its logical conclusion, then it would mean that it is not even the
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Petitioner who is the beneficial owner of the shares of HBL Global,
but it is the shareholders of the Petitioner who were the beneficial
owners of the shares of HBL Global. As stated earlier, Mr Mistri
submitted that this would lead to an absurd situation. He submitted
that this could never been the intention of the Legislature as such an
interpretation would lead to startling results and therefore has to be
avoided.
11. As far as the transaction of payment of interest of
Rs.4.41 Crores to HDB Welfare Trust is concerned, Mr Mistri
submitted that the beneficiaries of the said Trust are the employees
of the Petitioner and not the Petitioner. He, therefore, submitted
that the Trust does not come within the ambit of section 40A(2)(b) of
the Act as explanation (b) to section 40A(2)(b) clearly provides that
the Petitioner must be beneficially entitled to 20% of the profits in
the said Trust. He submitted that in the facts of the present case this
transaction did not fall within explanation (a) of section 40A(2)(b),
but explanation (b) to the said section. He submitted that
Respondent No.1 had proceeded on a factually wrong assumption
that the Petitioner possesses more than 20% of the rights in the said
Trust which makes it a related party as per the provisions of section
40A(2)(b) of the Act. He, therefore, submitted that even this
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transaction could never fall within the ambit and scope of a SDT as
contemplated under section 92BA(i) of the Act.
12. Mr Mistri then submitted that the whole premise of the
impugned order that these transactions are referred to as related
party transactions in form 3CD, was factually incorrect. This fact,
according to Mr Mistri, has been accepted by Respondent No.1 in an
affidavit-in-reply filed on behalf of the Revenue (page 356). He,
thereafter submitted that the impugned order is contrary to the
principles of natural justice and needs to be set aside on this ground
alone. He submitted that the notice issued to the Petitioner before
passing the impugned order was served on the Petitioner on 29th
December, 2016 at 01.29 a.m. asking the Petitioner to show cause by
11.00 a.m. of the same date. The Petitioner was given no personal
hearing and though the Petitioner filed its submissions in the
afternoon of 29th December, 2016, Respondent No.1 passed the
impugned order on the very same day. He submitted that even the
approval from the CIT was granted on the same day and thereafter
the reference in relation to these three transactions was made to TPO
also on the very same day. He submitted that looking to these facts it
was clear that the principles of natural justice had been clearly
violated as no effective opportunity was given to the Petitioner for
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showing cause to the notice issued by Respondent No.1. No personal
hearing was also granted to the Petitioner before passing the
impugned order, was the submission of Mr Mistri. He, therefore,
submitted that all this clearly goes to show that the impugned order
and the impugned reference are clearly illegal and bad in law, and
therefore, ought to be set aside by us in our extraordinary, equitable
and discretionary jurisdiction under Article 226 of the Constitution
of India.
13. On the other hand, Mr Chhotaray, learned advocate
appearing on behalf of the Revenue, submitted that for a specified
domestic transaction there are two types of pricing. First is the
Arms Length Price and the second is the Transfer Price. The ALP is
the price between unrelated parties. This price is determined by the
market forces. Transfer Price, on the other hand, is the price of the
transaction fixed between two related parties. Since these related
parties are subject to common control, the price of inter se
transactions amongst the related parties can be manipulated to
transfer profit from one party to another in order to evade tax. It is
for this very reason that the Transfer Pricing provisions were
brought into force by the Legislature so as to determine the ALP of a
transaction between related parties. He submitted that this was
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done in order to evade tax. If the Transfer Price was different from
the ALP the Taxing Officer could make adjustments after following
the provisions as set out in Chapter X of the Income Tax Act, 1961.
14. As far as the transaction of purchase of loans by the
Petitioner from HDFC Ltd. is concerned, Mr Chhotaray submitted
that it was wrong on the part of the Petitioner to claim that the
purchase of these loans is not an ‘expenditure’ since it is not debited
to the Profit and Loss Account. He submitted that the Petitioner is a
bank involved in banking business. In the normal course of its
business it indulges in the activity of purchasing and selling of loans.
These transactions, being a part of the business activity of the
Petitioner warrant to be treated as a business asset and stock. He
submitted that in the annual report of the Petitioner, the Petitioner
reported these related party transactions as purchases. He
submitted that the purchase of any asset / services cannot be made
without incurring an expenditure. For any asset, irrespective of
whether it is a current investment or a long term investment, an
expenditure has to be incurred. Such an expenditure constitutes the
cost of the asset. Moreover, the loan purchase transactions involve
expenditure every year by way of interest on such loans which is a
Revenue expenditure. Even when a capital asset is purchased, cost is
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incurred and such cost is then capitalized and becomes a part of the
balance-sheet. Nevertheless, the nature is ‘expenditure’ only. Mr
Chhotaray submitted that an expenditure is an outgo. The Petitioner
had incurred the expenditure for purchasing the loans and made
payment. This being the case it was clear that the current
transaction would clearly be a SDT as contemplated under section
92BA(i) of the Act.
15. Mr Chhotaray submitted that the argument of Mr Mistri
that HDFC Ltd. is not a person covered under section 40A(2)(b)(iv)
is incorrect. Mr Chhotaray submitted that under explanation (a) to
section 40A(2)(b) a person has substantial interest in the assessee if
it is the beneficial owner of the shares carrying not less than 20% of
the voting power. In the facts of the present case, Mr Chhotaray
submitted that HDFC Ltd. (holding 16.39 % shares in the Petitioner)
and it’s wholly owned subsidiary, HDFC Investments Pvt. Ltd.
(holding 6.25% of the shareholding in the Petitioner company),
together hold 22.64 % of the shares of the Petitioner. Mr Chhotaray
submitted that what is important to note is the voting power and not
the shareholding so as to fall within explanation (a). According to
Mr Chhotaray this issue is squarely covered by a decision of
Karnataka High Court in the case of Commissioner of Income Tax
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Vs. Amco Power Ltd. [(379 ITR 375) (KARN)]. He submitted
that this decision clearly holds that for the purpose of computing
voting power of the company in another company, the shareholding
of its wholly owned subsidiary has to be clubbed with its own share
holding. In the facts before Karnataka High Court, Mr Chhotaray
submitted that the shareholding of the company was only 6%
whereas its wholly owned subsidiary had a 45% share holding. In
these circumstances, it was held that taking into consideration the
shareholding of 45% of the wholly owned subsidiary, the voting
power of the company was 51% (i.e. 6% + 45%). Mr Chhotaray
submitted that in the facts of the present case, the situation is
identical. He submitted that taking into consideration the
shareholding of 6.25% of HDFC Investments Ltd. (and which is a
wholly owned subsidiary of HDFC Ltd.) in the Petitioner alongwith
the shareholding of 16.39% of HDFC Ltd. in the Petitioner, the total
voting power HDFC Ltd. had in the Petitioner was 22.64%. This was
clearly above 20% as required under explanation (a) to section
40A(2)(b) of the Act. Mr Chhotaray submitted that the word
“beneficial” appearing in explanation (a) is totally misconstrued by
the Petitioner. Mr Chhotaray submitted that if the Petitioner’s
submissions are accepted, the word ‘beneficial’ would become totally
redundant. In support of this proposition, Mr Chhotaray relied upon
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the decision of the Supreme Court in the case of CIT v/s Podar
Cement Pvt. Ltd. [1997 (226) ITR 625 (SC)]. Over and above
this, he submitted that even the CBDT circular No.6/b dated 6th July,
1968 while explaining the newly introduced provision of section
40A(2)(b) refers to holding substantial interest “directly or
indirectly”.
16. In addition to this, Mr Chhotaray submitted that even
before the US regulatory authorities, HDFC Ltd. had represented that
it was the beneficial owner of 22.64 % of the equity shares of the
Petitioner and exercised substantial influence over board decisions,
which could result in HDFC Ltd. making decisions or foregoing
opportunities to benefit HDFC Ltd that restrict their growth and
harm their financial condition. He submitted that HDFC Ltd., in its
annual report declared that it had ownership interest of 22.64 % in
the Petitioner – HDFC Bank Ltd. Looking to all these facts, Mr
Chhotaray submitted that it is too late in the day for the Petitioner to
contend that HDFC Ltd. was a beneficial owner of only 16.39% of the
shares in the Petitioner and not having more than 20% voting power.
He therefore submitted that the purchase of loans by the Petitioner
from HDFC Ltd. would clearly fall within ambit of section 92BA(i) to
mean a SDT.
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17. As far as the second transaction is concerned, namely,
the payment made by the Petitioner to HBL Global for the services
rendered, Mr Chhotaray submitted that the Petitioner received
services worth Rs.492.50 Crores from HBL Global. He submitted
that admittedly the Petitioner owns 29% of the shareholding in ADFC
Ltd. In turn, ADFC Ltd. holds 98.4% of the shareholding in its
subsidiary HDFC Global. Accordingly, the Petitioner had a
substantial interest, albeit indirectly, in HBL Global, was the
submission of Mr Chhotaray. In this regard Mr Chhotaray relied
upon provisions of section 40A(2)(b)(vi)(B) of the Act. Here also Mr
Chhotaray relied upon the CBDT circular dated 6th July, 1968 to
contend that even indirect shareholding would be covered. This
being the case, Mr Chhotaray submitted that even this transaction
with HBL Global would squarely fall within the meaning of a SDT as
contemplated under section 92BA(i) of the Act as it was a
transaction between two related parties.
18. As far as the third transaction is concerned, namely, the
payment of interest of Rs.4.41 Crores to HDB Trust is concerned, Mr
Chhotaray submitted that the Petitioner has a deposit of Rs. 45.12
Crores from HDB Welfare Trust and has paid interest of Rs.4.41
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Crores. He submitted that the Petitioner has a substantial interest in
terms of explanation (b) to section 40A(2)(b) of the Act. He
submitted that this issue has been discussed in detail by the Revenue
in its affidavit at page 355 to 358 of the paper book. Mr Chhotaray
submitted that section 92(2)(A) specifically mentions interest as an
item for determination of ALP. He submitted that the Petitioner is
the founder member of this Trust and the Trust held shares in the
Petitioner till 2006. The benefits enjoyed by the Trust when it was a
shareholder continues even now. The Petitioner has included the
reserves of HDB Welfare Trust of Rs.60.03 Crores in its reserve while
preparing a consolidated financial statement. The activities of the
Employees Welfare Trust have been included as other business
activities in the annual report of the Petitioner. He submitted that in
any case the payment of interest is an expenditure and it needs
examination whether the rate of interest was proper. He submitted
that for all these reasons even this transaction would be a SDT as
contemplated under section 92BA(i) of the Act. For all the aforesaid
reasons, Mr Chhotaray submitted that there was no merit in this
Writ Petition and the same ought to be dismissed with costs.
19. We have carefully gone through the papers and
proceedings in the present Writ Petition as well as the impugned
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order dated 29th December, 2016 and the impugned Reference dated
29th December, 2016. We have also given our anxious consideration
to the arguments advanced by the Petitioner as well as on behalf of
the Revenue. We find that the entire controversy in the present Writ
Petition basically revolves around the interpretation of section
92BA(i) read with section 40A(2)(b) of the I. T. Act. As mentioned
earlier, it is the case of the Revenue that the three transactions
mentioned hereinabove fall within the meaning of a Specified
Domestic Transaction (SDT), as set out in section 92BA(i) of the I. T.
Act. Section 92BA as it stood then, reads thus:-
“92-BA. Meaning of specified domestic transaction.— For the
purposes of this section and Sections 92, 92-C, 92-D and 92-E,
“specified domestic transaction” in case of an assessee
means any of the following transactions, not being an
international transaction, namely—
(i) any expenditure in respect of which payment has been
made or is to be made to a person referred to in clause
(b) of sub-section (2) of Section 40-A;
(ii) any transaction referred to in Section 80-A;
(iii) any transfer of goods or services referred to in subsection
(8) of Section 80-IA;
(iv) any business transacted between the assessee and
other person as referred to in sub-section (10) of Section
80-IA;
(v) any transaction, referred to in any other section under
Chapter VI-A or Section 10-AA, to which provisions of
sub-section (8) or sub-section (10) of Section 80-IA are
applicable; or
(vi) any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by
the assessee in the previous year exceeds a sum of five crore
rupees.”
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20. Section 92BA of the I. T. Act sets out the meaning of a
SDT and stipulates that for the purposes of this section and sections
92, 92C, 92D and 92E “Specified Domestic Transactions” in the case
of an assessee inter alia means the transactions set out thereunder
from clauses (i) to (vi). As far as the above three transactions are
concerned, it is common ground before us that if they were to fall
within the term of a SDT, they would be covered under clause (i) of
section 92BA which provides that it should be a transaction between
the assessee and a person referred to in section 40A(2)(b) for an
expenditure in respect of which payment has been made or is to be
made to such person. In other words, if a transaction is with
reference to an expenditure in respect of which payment has been
made or is to be made by the assessee to a person referred to in
section 40A(2)(b), only then would the same be a SDT. For this
purpose it would therefore also be necessary to reproduce section
40A, to the extent it is relevant to decide the present controversy.
Section 40A deals with expenses or payments not deductible in
certain circumstances and the relevant portion thereof reads thus:
“40-A. Expenses or payment not deductible in certain
circumstances.— (1) The provisions of this section shall have effect
notwithstanding anything to the contrary contained in any other
provision of this Act relating to the computation of income under the
head “Profits and gains of business or profession”.
(2) (a) Where the assessee incurs any expenditure in respect of
which payment has been or is to be made to any person referred to
in clause (b) of this sub-section, and the Assessing Officer is of
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opinion that such expenditure is excessive or unreasonable having
regard to the fair market value of the goods, services or facilities for
which the payment is made or the legitimate needs of the business
or profession of the assessee or the benefit derived by or accruing
to him therefrom so much of the expenditure as is so considered by
him to be excessive or unreasonable shall not be allowed as a
deduction;
Provided that no disallowance, on account of any expenditure being
excessive or unreasonable having regard to the fair market value,
shall be made in respect of a specified domestic transaction referred
to in Section 92-BA, if such transaction is at arm’s length price as
defined in clause (ii) of Section 92-F.
(b) The persons referred to in clause (a) are the following, namely:—
(i) where the assessee is an individual any relative of the assessee
(ii) where the assessee is a company, any director of the company,
firm, association of persons or partner of the firm, member
Hindu undived family of the association or family, or
any relative of such director,
partner or member,
(iii) any individual who has a substantial interest in the business
or profession of the assessee, or any relative of such
individual;
(iv) a company, firm, association of persons or Hindu undivided
family having a substantial interest in the business or
profession of the assessee or any director, partner or member
of such company, firm, association or family, or any relative of
such director, partner or member or any other company
carrying on business or profession in which the first
mentioned company has substantial interest;
(v) a company, firm, association of persons or Hindu undivided
family of which a director, partner or member, as the case may
be, has a substantial interest in the business or profession of
the assessee; or any director, partner or member of such
company, firm, association or family or any relative of such
director, partner or member;
(vi) any person who carries on a business or profession,—
(A) where the assessee being an individual, or any relative of
such assessee, has a substantial interest in the business
or profession of that person; or
(B) where the assessee being a company, firm, association of
persons or Hindu undivided family, or any director of such
company, partner of such firm or member of the
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association or family, or any relative of such director,
partner, or member, has a substantial interest in the
business or profession of that person.
Explanation.—For the purposes of this sub-section, a person
shall be deemed to have a substantial interest in a business or
profession, if,—
(a) in a case where the business or profession is carried on by a
company, such person is, at any time during the previous year,
the beneficial owner of shares (not being shares entitled to a
fixed rate of dividend whether with or without a right to
participate in profit) carrying not less than twenty per cent of the
voting power; and
(b) in any other case, such person is, at any time during the previous
year, beneficially entitled to not less than twenty per cent of the
profits of such business or profession.”
21. Since the other sub-sections of section 40A are not
relevant, they have not been reproduced. Section 40A(2)(a)
stipulates that where the assessee incurs any expenditure in respect
of which payment has been made or is to be made to any person
referred to in clause (b) of this sub-section, and the A.O. is of the
opinion that such expenditure is excessive or unreasonable having
regard to the fair market value of the goods, services or facilities for
which the payment is made or the legitimate needs of the business or
profession of the assessee, or the benefit derived by or accruing to
him therefrom, so much of the expenditure as is so considered by
him to be excessive or unreasonable, shall not be allowed as a
deduction. The proviso to sub-section 2(a) stipulates that no
disallowance, on account of any expenditure being excessive or
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unreasonable having regard to the fair market value, shall be made
in respect of a SDT referred to in section 92BA, if such transaction is
at the ALP as defined in clause (ii) of section 92F.
22. Then comes clause (b) of section 40A(2) and refers to
certain entities. In the present case, reliance has been placed by the
Revenue on clauses (iv) & (vi)(B) of section 40A(2)(b) to contend
that the transactions which form the subject matter of this Petition
would fall within the meaning of a SDT. What section 40A(2)(a) read
with section 40A(2)(b)(iv) provides is that where the assessee
incurs any expenditure in respect of which payment has been or is to
be made to any company, firm, association of persons or Hindu
undivided family having a substantial interest in the business or
profession of the assessee, or any director, partner or member of
such company, firm, association or family or any relative of such
director, partner or member or any other company carrying on
business or profession in which the first mentioned company has a
substantial interest, and the A.O. is of the opinion that such
expenditure is excessive or unreasonable, then he can disallow such
expenditure as a deduction. What is the meaning of ‘substantial
interest’ has then been set out by the Legislature in the explanations
(a) and (b) to section 40A(2)(b). Explanation (a) clearly sets that in
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the case where a business or profession is carried on by a company,
such person is, at any time during the previous year, the beneficial
owner of shares (not being shares entitled to a fixed rate of dividend
whether with or without a right to participate in profits), carrying
not less than 20% of the voting power, would be deemed to have a
substantial interest. Explanation (b) stipulates that in any other
case, such person is, at any time during the previous year,
beneficially entitled to not less than 20% of the profits of such
business or profession.
23. On a conjoint reading of section 92BA(i) read with section
40A(2)(b), in the facts of the present case, what becomes clear is
that for the transactions referred to earlier to fall within the
meaning of a SDT, the assessee has to have a transaction (not being
an international transaction) with a person as listed in clauses (i) to
(vi) of section 40A(2)(b).
24. In the facts before us, it is common ground that the
transactions which form the subject matter of the present Writ
Petition, if were to be construed as a SDT, then the same would have
to fall within section 92BA(i) which states that any transaction in
which any expenditure in respect of which payment has been made
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or is to be made by the assessee to a person referred to in clause (b)
of sub-section 2 of section 40A, would be a SDT. This being the case,
we shall now examine whether each of these transactions fall within
the meaning of a SDT.
TRANSACTION-1
LOANS PURCHASED BY THE PETITIONER FROM HDFC
LIMITED:-
25. It is undisputed that the Petitioner purchased the loans of
HDFC Ltd. of more than Rs. 5,000 Crores. HDFC Ltd. admittedly
holds 16.39% of the shareholding in the Petitioner. If one were to go
merely by this figure of 16.39%, then, on a plain reading of section
40A(2)(b)(iv) read with explanation (a) thereof, HDFC Ltd. would
not be a person who would have a substantial interest in the
Petitioner. This is simply because explanation (a) clearly stipulates
that for one to have a substantial interest, it should be the beneficial
owner of shares carrying not less than 20% of the voting power.
26. However, the Revenue contends that the requirement of
explanation (a) of having more than of 20% of the voting power is
clearly established in this case because HDFC Ltd. holds 100% of the
shareholding in another company called HDFC Investment Ltd.,
which in turn, holds 6.25% shareholding in the Petitioner. When
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one clubs the shareholding of HDFC Ltd. of 16.39% with the
shareholding of the HDFC Investments Ltd. of 6.25% (and which is a
wholly owned subsidiary of HDFC Ltd.), the threshold of 20% as
required under explanation (a) to section 40A(2)(b), is clearly
crossed. This being the case, it is the Revenue’s contention that
HDFC Ltd. clearly has a substantial interest in the Petitioner, and
therefore, the transaction of purchasing loans by the Petitioner from
HDFC Ltd. would fall within the meaning of a SDT, in which case, for
this transaction, the ALP has to be determined by the TPO.
27. On a plain reading of the aforesaid provisions, we are
unable to agree with the submissions of the Revenue. What
explanation (a) to section 40A(2)(b) clearly stipulates is that a
person shall be deemed to have a substantial interest in a business or
profession in a case where the business or profession is carried on by
a company, such person is, at any time during the previous year, the
beneficial owner of shares carrying not less than 20% of the voting
power. In other words, explanation (a) when broken down, requires
two conditions that need to be fulfilled. The first condition is that,
that the person should be the beneficial owner of shares (not being
shares entitled to a fixed rate of dividend whether with or without a
right to participate in profits); and second that these shares (of
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which the person is the beneficial owner) are carrying not less than
20% of the voting power. In the facts of the present case, admittedly
HDFC Ltd., on its own, is not the beneficial owner of shares carrying
at least 20% of the voting power as required under explanation (a) to
section 40A (2) (b) of the I. T. Act. The shareholding that HDFC Ltd.
has in the Petitioner is only 16.39%.
28. We cannot, and the law does not permit us, to hold that
HDFC Ltd. is the beneficial owner of 22.64% of the shares in the
Petitioner by clubbing the share holding of HDFC Investments Ltd.
with the shareholding of HDFC Ltd. If we were to do this, we would
be effectively holding that HDFC Ltd., being a shareholder of HDFC
Investments Ltd., is the beneficial owner of the shares which HDFC
Investments Ltd. holds in the Petitioner. This, in law, is clearly
impermissible because a shareholder of a company can never have
any beneficial interest in the assets (movable or immovable) of that
company. In the present case, if we were to accept the contention of
the Revenue, it would mean that HDFC Ltd. is the beneficial owner of
the shares which HDFC Investments Ltd. holds in the Petitioner. This
would be contrary to all canons of Company Law. It is well settled
that a shareholder of a company can never be construed either the
legal or beneficial owner of the properties and assets of the company
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in which it holds the shares. This being the position in law, we find
that the Revenue is incorrect in trying to club the shareholding of
HDFC Investments Ltd. in the Petitioner along with the shareholding
of HDFC Ltd. in the Petitioner, to cross the threshold of 20% as
required in explanation (a) to section 40A(2)(b). We are supported
in the view that we take by a decision of the Supreme Court in the
case of Bacha F. Guzdar Vs. Commissioner of Income Tax [(1955)
27 ITR 1]. The relevant portion of this decision reads thus:-
“7. It was argued by Mr Kolah on the strength of an observation
made by Lord Anderson in Commissioners of Inland
Revenue v. Forrest [8 Tax Cases, p 704 at 710] that an investor buys
in the first place a share of the assets of the industrial concern
proportionate to the number of shares he has purchased and also
buys the right to participate in any profits which the company may
make in the future. That a shareholder acquires a right to participate
in the profits of the company may be readily conceded but it is not
possible to accept the contention that the shareholder acquires any
interest in the assets of the company. The use of the word ‘assets’ in
the passage quoted above cannot be exploited to warrant the
inference that a shareholder, on investing money in the purchase of
shares, becomes entitled to the assets of the company and has any
share in the property of the company. A shareholder has got no
interest in the property of the company though he has undoubtedly a
right to participate in the profits if and when the company decides to
divide them. The interest of a shareholder vis-a-vis the company was
explained in the Sholapur Mills Case[(1950) SCR 869, 904] . That
judgment negatives the position taken up on behalf of the appellant
that a shareholder has got a right in the property of the company. It
is true that the shareholders of the company have the, sole
determining voice in administering the affairs of the company and
are entitled, as provided by the Articles of Association to declare
that dividends should be distributed out of the profits of the company
to the shareholders but the interest of the shareholder either
individually or collectively does not amount to more than a right to
participate in the profits of the company. The company is a juristic
person and is distinct from the shareholders. It is the company which
owns the property and not the shareholders. The dividend is a share
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of the profits declared by the company as liable to be distributed
among the shareholders. Reliance is placed on behalf of the
appellant on a passage in Buckley’s Companies Act (12th Edn.), p.
894 where the etymological meaning of dividend is given as
dividendum, the total divisible sum but in its ordinary sense it means
the sum paid and received as the quotient forming the share of the
divisible sum payable to the recipient. This statement does not justify
the contention that shareholders are owners of a divisible sum or
that they are owners of the property of the company. The proper
approach to the solution of the Question 1s to concentrate on the
plain words of the definition of agricultural income which connects
in no uncertain language revenue with the land from which it
directly springs and a stray observation in a case which has no
bearing upon the present question does not advance the solution of
the question. There is nothing in the Indian law to warrant the
assumption that a shareholder who buys shares buys any interest in
the property of the company which is a juristic person entirely
distinct from the shareholders. The true position of a shareholder is
that on buying shares an investor becomes entitled to participate in
the profits of the company in which he holds the shares if and when
the company declares, subject to the Articles of Association, that the
profits or any portion thereof should be distributed by way of
dividends among the shareholders. He has undoubtedly a further
right to participate in the assets of the company which would be left
over after winding up but not in the assets as a whole as Lord
Anderson puts it.
(emphasis supplied)
29. This proposition has again been reiterated by the
Supreme Court in Vodafone International Holdings BV v. Union of
India [(2012) 6 SCC 613]. Paragraphs 256 to 258 of this decision
read thus:-
“256. Subsidiary companies are, therefore, the integral part of
corporate structure. Activities of the companies over the years have
grown enormously of its incorporation and outside and their
structures have become more complex. Multinational companies
having large volume of business nationally or internationally will
have to depend upon their subsidiary companies in the national and
international level for better returns for the investors and for the
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growth of the company. When a holding company owns all of the
voting stock of another company, the company is said to be a WOS
of the parent company. Holding companies and their subsidiaries can
create pyramids, whereby a subsidiary owns a controlling interest in
another company, thus becoming its parent company.
257. The legal relationship between a holding company and WOS is
that they are two distinct legal persons and the holding company
does not own the assets of the subsidiary and, in law, the
management of the business of the subsidiary also vests in its Board
of Directors. In Bacha F. Guzdar v. CIT [AIR 1955 SC 74] , this
Court held that shareholders’ only right is to get dividend if and when
the company declares it, to participate in the liquidation proceeds
and to vote at the shareholders’ meeting. Refer also to Carew and
Co. Ltd. v. Union of India [(1975) 2 SCC 791] and Carrasco
Investments Ltd. v. Directorate of Enforcement [(1994) 79 Comp
Cas 631 (Del)] .
258. Holding company, of course, if the subsidiary is a WOS, may
appoint or remove any Director if it so desires by a resolution in the
general body meeting of the subsidiary. Holding companies and
subsidiaries can be considered as single economic entity and
consolidated balance sheet is the accounting relationship between the
holding company and subsidiary company, which shows the status of
the entire business enterprises. Shares of stock in the subsidiary
company are held as assets on the books of the parent company and
can be issued as collateral for additional debt financing. Holding
company and subsidiary company are, however, considered as
separate legal entities, and subsidiary is allowed decentralised
management. Each subsidiary can reform its own management
personnel and holding company may also provide expert, efficient
and competent services for the benefit of the subsidiaries.”
(emphasis supplied)
30. In the facts before us it may be true that HDFC Ltd. may
indirectly have 20% of the voting power in the Petitioner because
HDFC Investments Ltd. is a wholly owned subsidiary of HDFC Ltd.
However, that by itself would not mean that HDFC Ltd. has a
substantial interest in the Petitioner as required and stipulated in
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explanation (a) to section 40A(2)(b). As mentioned earlier, for a
person to have a substantial interest as contemplated under
explanation (a), two conditions have to be fulfilled, namely (i) that
the person has to be the beneficial owner of the shares and (ii) those
very shares have to carry not less than 20% of the voting power. It is
only when these two conditions are fulfilled that explanation (a) can
be pressed into service. In the facts before us, if we were to accept
the submission of the Revenue, then we would have to hold that
HDFC Ltd. is the beneficial owner of the 6.25% shareholding that
HDFC Investments Ltd. has in the Petitioner. This 6.25%
shareholding of HDFC Investments Ltd in the Petitioner is the
movable property and an asset of HDFC Investment Ltd. That would
mean that HDFC Ltd., holding 100% shares of HDFC Investments
Ltd., would have to be construed as the beneficial owner of the
properties/assets of HDFC Investments Ltd. This can never be the
case because that would be contrary to all canons of company law as
well as the decisions of the Supreme Court in the case of Bacha F.
Guzder and Vodafone International Holdings BV (supra). This
being the case, HDFC Ltd., by no stretch of the imagination can be
said to be the beneficial owner of the shares that HDFC Investments
Ltd. holds in the Petitioner. This is simply because the shares that
HDFC Investments Ltd. holds in the Petitioner is its asset, and HDFC
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Ltd., though being a 100% shareholder of HDFC Investments Ltd.,
cannot be termed as the owner (beneficial or otherwise) of the assets
and properties of HDFC Investments Ltd. In these circumstances,
therefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd.
cannot be clubbed together to cross the threshold of 20% as required
under explanation (a). This being the position, we have no
hesitation in holding that the HDFC Ltd. does not have a substantial
interest in the Petitioner, and therefore, is not a person as
contemplated under section 40A(2)(b)(iv) for the present
transaction to fall within the meaning of a SDT as set out in section
92BA (i) of the I. T. Act.
31. There is another reason for coming to this conclusion. If
we were to interpret this provision as is sought to be contended by
the Revenue, it would lead to an absurd situation, as correctly
contended by Mr. Mistri. It is undisputed that there cannot be more
than one beneficial owner of the same shares. If we were to take the
example that was given by Mr. Mistri during arguments, it would
effectively lead to a completely absurd result. Take for example
Company ‘A’ has a wholly owned subsidiary Company ‘B’. In turn, the
shares of Company ‘C’ are held 90% by Company ‘B’ and 10% by
Company ‘A’. If one was to give the interpretation as sought for by
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the Revenue, then it would mean that Company ‘A’ beneficially owns
100% of Company ‘C’ which would lead to an absurd situation that
Company ‘B’; though owning 90% of the shareholding in Company
‘C’, would not be regarded as having a substantial interest in
Company ‘C’ as Company ‘B’ cannot be said to be the beneficial
owner of its 90% shareholding in Company ‘C’. Further, if the
interpretation of the Revenue was to be held as correct then one will
not have to not stop there and then also see the shareholders of
Company ‘A’ as the beneficial owner of the shares of Company ‘C’.
This would then lead to absurd results, namely, that then even
Company ‘A’ also would not have a substantial interest in Company
‘C’ and it would be the shareholders of Company ‘A’ that would have
a substantial interest in Company ‘C’. This would lead to startling
results. It is now well settled that whilst interpreting a statutory
provision, an interpretation which would lead to an absurdity, should
always be avoided. This is yet another reason why we are unable to
accept the submission of the Revenue that this particular transaction
would fall within the meaning of a SDT as understood and set out in
section 92BA (i) of the I. T. Act.
32. There is yet another reason that we find that the present
transaction (purchase of loans by the Petitioner from the HDFC Ltd.)
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could never be termed as a SDT. Section 92BA (i) contemplates a
transaction in which any expenditure is incurred in respect of which
payment has been made or is to be made to a person referred to in
clause (b) of sub-section 2 of section 40A of the I. T. Act. What we
find in the facts of the present case is that the Petitioner had
purchased the loans of HDFC Limited. This was a purchase of an
asset. As correctly submitted by Mr. Mistri, when the purchaser
pays the price for acquiring an asset it is referred to as a
consideration for purchase of that asset and not an ‘expenditure’ for
that asset. Acquisition of an asset, therefore, cannot be said to be in
the nature of an expenditure so as to come within the ambit of
section 92BA (i) of the Act. It is true that consideration has to be
paid for purchasing an asset but that would not mean that it is an
‘expenditure’. Mr. Mistri is correct when he submits that an asset
would be reflected in the balance-sheet of the company whereas an
expenditure would be reflected in the Profit and Loss account. In
fact, in the facts of the present case, the loans purchased by the
Petitioner from HDFC Ltd. were reflected in the balance-sheet and
not in the Profit and Loss account. This being the case, we find that
this is not an expenditure at all as contemplated under section
92BA(i), and therefore, the money expended for purchasing these
loans can never be termed as an ‘expenditure’ incurred by the
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Petitioner. It would, therefore, not fall within the meaning of a SDT as
understood under section 92BA(i) of the Act.
33. For all the aforesaid reasons, we therefore have no
hesitation in holding that this transaction of purchase of loans by the
Petitioner from HDFC Ltd. would not fall within the meaning of a SDT.
This being the case, there was no question of Respondent No.1
treating it so and thereafter referring the same to the TPO under
section 92CA(1) for determining the ALP.
TRANSACTION-2
PAYMENT MADE BY THE PETITIONER TO HBL GLOBAL
PRIVATE LIMITED FOR RENDERING SERVICES:-
34. As far as this transaction is concerned, it is the
contention of the Revenue that it would be a transaction with a
person falling within section 40A(2)(b)(vi)(B) of the I. T. Act.
Section 40A(2)(b)(vi) reads thus:-
“(vi) any person who carries on a business or profession,—
(A) where the assessee being an individual, or any relative of
such assessee, has a substantial interest in the business
or profession of that person; or
(B) where the assessee being a company, firm, association of
persons or Hindu undivided family, or any director of such
company, partner of such firm or member of the
association or family, or any relative of such director,
partner, or member, has a substantial interest in the
business or profession of that person.”
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(emphasis supplied)
35. As far as this transaction is concerned, we find that the
Petitioner holds 29% of the shares in ADFC Ltd. In turn, ADFC Ltd.
holds 98.4% of the shares in HBL Global. It is not in dispute that the
Petitioner holds no shares of HBL Global. Merely because the
Petitioner holds 29% of the shares of ADFC Ltd., which in turn holds
98.4% shares in HBL Global, the Petitioner cannot be regarded as
having a substantial interest in HBL Global. For us to hold that the
Petitioner would have a substantial interest in HBL Global, we would
have to hold that the Petitioner, because it holds 29% of the
shareholding in ADFC Ltd., is the beneficial owner of 98.4% of the
shares of HBL Global which are held by ADFC Ltd. This in law, and as
discussed in detail earlier, we cannot do because the Petitioner, being
a shareholder of ADFC Ltd., does not have any interest (beneficial or
otherwise) in the properties/assets of ADFC Ltd. (which in this case
would be the shareholding that ADFC Ltd. has in HBL Global). This
being the case, we find that even this transaction is not entered into
with a person as mentioned in section 40A(2)(b)(vi)(B) of the I. T.
Act. Here also, we find merit in the submission of Mr. Mistri that if
the plea of the Revenue is taken to its logical conclusion, then, it
would mean that it is not the Petitioner which is the beneficial owner
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of the shares of HBL Global but it would be the shareholders of the
Petitioner who are the beneficial owner of the shares of HBL Global.
This could never have been the intention of the Legislature.
36. To counter this argument, Mr. Chhotaray placed reliance
on the Circular dated 6th July, 1968 and stated that the said Circular
issued by the CBDT clearly states that for the purposes of section
40A(2)(b) direct and indirect shareholding has to be taken into
account. We are unable to agree with the submissions of Mr.
Chhotaray. There is no question in the facts of the present case to
refer to or consider any indirect shareholding. As mentioned earlier,
on a plain reading of explanation (a) to section 40A(2)(b), for there
to be a substantial interest, the person has to be the beneficial owner
of shares holding not less than 20% of the voting power. In this
transaction, the Petitioner can never be said to be beneficial owner of
the shares in HBL Global for the simple reason that it holds
absolutely no shares in HBD Global. It holds shares in a company
called ADFC Ltd., which in turn holds 98.4% shares in HBL Global.
This would not mean that either directly or indirectly the Petitioner
is the beneficial owner of the shares of HBD Global. We, therefore,
find no merit in this contention.
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37. We would also like to take note of the Guidance Note on
Report under section 92E of I.T. Act issued by Institute of Chartered
Accounts of India which states as under:-
“4A.16 As in the case of section 92A(2)(a) and (b) (which defines the
term ‘associated enterprise’ for the purposes of international
transactions) the phrase “directly or indirectly” is not used in
Section 40A(2)(b). However, in this regard, reference should be
made to the Central Board of Direct Taxes’ Circular number 6-P
dated 6 July 1968 explaining the then newly inserted provisions in
section 40A(2). This circular sets out the categories of the persons,
payments to whom fall within the purview of section 40A(2). It
mentions that such persons would include inter alia-
“(c) persons in whose business or profession the taxpayer has a
substantial interest directly or indirectly”.
“However, Explanation to Section 40A(2) deems a person to have
substantial interest if such person is ‘beneficial owner’ of shares
carrying not less than 20% of voting power. The expression
“beneficial owner” needs to be construed in contrast to “legal
owner” and not in the context of determining indirect ownership of
shares. Hence, the emphasis is on covering the real owner of the
shares and not the nominal owner. This proposition is also
supported by legal jurisprudence which states that in a multi-tier
structure, a parent cannot be regarded as the beneficial owner of
shares in a downstream subsidiary merely because it owns the
shares of the intermediate subsidiary companies. It is important to
respect the fact that the entities are separate legal entities.
Consequently, in a situation where A Ltd. holds 50% in B Ltd. and B
Ltd. holds 50% in C Ltd., under ordinary circumstances, A Ltd.
cannot be regarded as having beneficial interest in C Ltd. In other
words, for purposes of Section 40A(2)(b), it may be appropriate to
consider only direct shareholding and not derivative or indirect
shareholding.
4A.17 The coverage of section 40A(2)(b) is very wide and covers
persons related to the assessee under several relationships. Thus the
assessee and the accountant should ensure that all relevant
expenditure transactions with all specified persons as mentioned in
section 40A(2)(b) should be carefully identified and included in
transfer pricing documentation and accountant’s report. With
regard to ensuring completeness of such information, the accountant
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should obtain a written representation from the assessee detailing
the list of persons specified in section 40A(2)(b) and expenditure
transactions with them.”
38. From this Guidance Note what is clear is that the word
“beneficial owner” needs to be construed in contrast to “legal owner”
and not in the context of determining indirect ownership of shares.
Hence, the emphasis is on covering the real owner of the shares and
not the nominal owner. The report further states that this
proposition is also supported by legal jurisprudence which states that
in a multi-tier structure, a parent cannot be regarded as the
beneficial owner of shares in a downstream subsidiary merely
because it owns the shares of the intermediate subsidiary companies.
It is important to respect the fact that the entities are separate legal
entities. This Guidance Note also gives an example which clearly
indicates that for the purpose of section 40A(2)(b) it may be
appropriate to consider only a direct shareholding and not a
derivative or indirect shareholding. In fact, the Supreme Court in
the case of Commissioner of Income Tax v/s Virtual Soft Systems
Limited [(2018) 404 ITR 409 (SC) : (2018) 6 SCC 584)] has
categorically discussed the relevancy of the Guidance Note and for
the purposes of interpretation, the Supreme Court has held that it
can certainly be used as an aid to interpret the provision. Paragraph
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18 [of the SCC report] of this decision reads thus:-
“18. Without a doubt, in a catena of cases, this Court has discussed
the relevancy of the Guidance Note. While dealing with one of such
matters, this Court, in CIT v. Punjab Stainless Steel
Industries [CIT v. Punjab Stainless Steel Industries, (2014) 15 SCC
129] held as under: (SCC p. 134, para 17)
“17. So as to be more accurate about the word “turnover”,
one can either refer to dictionaries or to material which are
published by bodies of accountants. The Institute of
Chartered Accountants of India (hereinafter referred to as
“ICAI”) has published some material under the head
“Guidance Note on Tax Audit under Section 44-B of the
Income Tax Act”. The said material has been published so
as to guide the members of ICAI. In our opinion, when a
recognised body of Accountants, after due deliberation and
consideration publishes certain materials for its members,
one can rely upon the same.””
39. For all the aforesaid reasons, we are unable to accept the
submission of Mr. Chhotaray that the present transaction (namely
the payment made by the Petitioner to HBL Global for services
rendered) would fall within the meaning of a SDT as understood and
covered under section 92BA(i) of the I.T. Act.
TRANSACTION-3
PAYMENT OF INTEREST OF RS. 4.41 CRORES BY THE
PETITIONER TO HDB WELFARE TRUST.
40. As far as this transaction is concerned, it is the case of
the Revenue that the Petitioner has deposits of Rs.45.12 Crores from
the HDB Employee Welfare Trust and has paid interest of Rs.4.41
Crores. According to the Revenue, the Petitioner has a substantial
interest in terms of explanation (b) to section 40A(2)(b) of the Act.
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Explanation (b) stipulates that in any other case [i.e. other than a
person mention in explanation (a)], a person is said to have a
substantial interest if such person is at any time during the previous
year, beneficially entitled to not less than 20% of the profits of such
business or profession.
41. We fail to see how the Revenue can contend that the
transaction of payment of interest to HBD Welfare Trust and which
Trust has been set up for the benefit of its employees, would fall
within Explanation (b) to section 40A (2)(b) of the I. T. Act. It is not
even the case of the Revenue that the Petitioner is entitled to at least
20% of the profits of the said Trust. The Trust has been set up
exclusively for the welfare of its employees and there is no question
of the Petitioner being entitled to 20% of the profits of such Trust.
This being the case, we find that this transaction also clearly would
not fall within section 40A(2)(b) read with explanation (b) thereof to
be a SDT as understood and covered by section 92BA(i) of the I. T.
Act.
42. Before parting, it would only be fair to deal with the
judgments relied upon by Mr. Chhotaray. The first decision was of
the Karnataka High Court and the other was of the Supreme Court.
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On carefully going through the decision of the Karnataka High Court
in the case of Commissioner of Income Tax Vs. Amco Power
Systems Ltd. (supra), we find that the reliance thereon by Mr
Chhotaray is wholly misplaced. What the Karnataka High Court was
considering in the facts of that case were the provisions of section 79
of the I.T. Act and which are materially different from section
40A(2)(b) which is being considered by us in the present Writ
Petition. In fact when one peruses section 79 of the I.T.Act, it is clear
that the same deals with carry forward and set off of losses in the
case of certain companies. It is on the wording of section 79 of the
I.T. Act, that the Karnataka High Court has given a finding that since
ABL was having complete control over APIL and even though the
shareholding of ABL was reduced to 6% in the year in question, yet
by virtue of being the holding company, owning 100 % shares of
APIL, the voting power of ABL could not be said to have been reduced
to less than 51%. It came to this finding because ABL, together with
APIL were having voting power of 51%. This finding of the
Karnataka High Court was given because the wordings of section 79
of the I.T. Act are materially different from the wordings of Section
40A(2)(b). We, therefore, find that the reliance placed by Mr
Chhotaray on this decision is wholly misconceived.
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43. Similarly, we find that the reliance placed by Mr
Chhotaray on the decision of the Supreme Court in the case of CIT
v/s Podar Cement Pvt. Ltd. (supra) is wholly misplaced. In this
case, the Supreme Court was called upon to decide whether in law the
income derived by the assessee company by letting out flats of a
building is taxable under the head ‘Income from other Sources’ under
section 56 of the Act or whether the same was to be taxed as ‘Income
from House Property’ under section 22 of the Act. On carefully going
through this judgment, we do not see how this decision in any way
supports the contention of Mr Chhotaray. Section 22 of the Act deals
with ‘Income from House Property’ and stipulates that the annual
value of property of any buildings or lands appurtenant thereto of
which the assessee is the owner, other than such portions of such
property as he may occupy for the purpose of any business of
profession carried on by him the profits of which are chargeable to
income tax, shall be chargeable to income tax under the head ‘Income
from House Property’. The owner of house property has also been
defined in section 27 and clause (iii) thereof inter alia stipulates that
a member of a co-operative society to whom a building or part
thereof is allotted or leased under a house building scheme of the
society, shall be deemed to be the owner of that building or part
thereof. Section 27(iii)(a) and (iii)(b) also set out who shall be
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deemed to be the owner in certain circumstances. It is whilst
interpreting these provisions, the Supreme Court was deciding as to
who would be the owner as contemplated under section 22 of the Act.
We fail to see that this judgment can be of any assistance to the
Revenue in the facts and circumstances of the present case. The
Supreme Court was considering completely different sections of
Income Tax Act and whose wordings are materially different from
the wordings of section 40A(2)(b) of the Act. We therefore find that
the reliance placed by Mr Chhotaray on this decision is also wholly
misplaced.
44. In view of the foregoing discussion, we find that none of
the three transactions that form the subject matter of this Petition
fall within the meaning of a SDT as required under section 92BA(i) of
the I.T. Act. This being the case, we find that Respondent No.1 was
clearly in error in concluding that these transactions were SDTs, and
therefore required to be disclosed by the Petitioner by filing Form
3CEB. He therefore could not have referred these transactions to
Respondent No.2 for determining the ALP.
45. In these circumstances, and in view of the foregoing
discussion, the Writ Petition is allowed in terms of prayer clause (a).

Rule is made absolute in the aforesaid terms. However, in the facts
and circumstances of the case, there shall be no order as to costs.
( B.P.COLABAWALLA J. ) ( S.C.DHARMADHIKARI J. )